Please refer to the case on Saudi Arabia - Ready for Takeoff (a country risk assessment), you need to prepare a case report about your risk assesment on Saudi Economy from past to the present and in the future. You need to respond to the following questions in your risk analysis.1) Why country risk is important and how Saudi Arabia was stood at international investment arena in 2009?2) what were the major risks and challenges in 2009 that hinders Saudi Arabia's competitiveness in international markets3) How the Saudi Economy transformed in the last TEN years and what risk are mitigated during this period and how?4) What is your risk assessment of the current conditions in Saudi Arabia? what do you suggest to improve risk profile and attract foreign investment in line with Saudi Vision 2030
Saudi Arabia: Ready for Takeoff? TB0027 Copyright © 2009 Thunderbird School of Global Management. All rights reserved. This case was prepared by Dr. F. John Mathis, Professor of Global Finance, and Dr. Barbara S. Petitt, Visiting Associate Professor of Global Finance, for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. F. John Mathis Barbara S. Petitt Saudi Arabia: Ready for Takeoff? The Kingdom of Saudi Arabia (KSA) has a population of 25 million people. Of these, 35 percent are under the age of 15, and only four percent are over the age of 60, with a life expectancy of 71 years for men and 75 years for women. Seventy-two percent of employment is in the service sector, 21 percent is in industry (energy and related activities), while the remaining seven percent is in agriculture. Unemployment during the past decade has run just under five percent. Similar to the United States, 97 percent of households have color television sets, and 78 percent have cell phones, but only 14 people out of 100 have computers, compared to 76 in the United States and 47 in the European Union (12). Seth Thomas had just read this information in The Economist, Pocket World in Figures, 2009 Edition. He had also read about KSA’s plan to build six new “Economic Cities,” as well as its “10 x 10” mission to make Saudi Arabia one of the top ten most competitive countries by 2010. Seth, as Chairman of the Board and CEO of World Communications Corporation (WCC), was always looking for new markets to expand his company’s business. WCC, based in the United States, supplied not only telephone services, but also digital cable television, digital cell phone service, and digital Internet services. Seth saw the low number of computers in use per capita, and thought this presented an interesting opportunity. His next step was to explore the government regulations concerning foreign investment, a task he would assign to his finance and marketing departments at their regular Monday morning meeting. Global Competitiveness In an annual survey of global competitiveness done by International Institute for Management Development (IMD), Saudi Arabia ranked a surprisingly high 35th out of 131 participating countries.1 One of the most important factors contributing to this high ranking was macroeconomic stability, where it ranked third out of 131 countries. However, the sophistication of company operations and strategy, and the quality of the national business environment, ranked about 50th out of 127 countries (four countries did not report). The five major problems identified and ranked as issues for doing business in the Kingdom were: inefficient government bu- reaucracy, inadequately educated workforce, restrictive labor regulations, inadequate supply of infrastructure, and lack of access to financing. Workers in Saudi Arabia were not only inadequately educated, but were also deemed to have a poor work ethic. Consequently, a dependency on imported foreign workers had developed, resulting in anxiety among the local Saudi workers. As a result, the government put into place a program that required companies to hire Saudi nationals. KSA had launched a program to attract foreign investment into the country in support of its new “Eco- nomic Cities,” which it was promoting aggressively. Several changes were under way by the government to address some of the weaker aspects of its global competitiveness ranking. One of the most important of these improvement efforts was the centralization in one government ministry—the Saudi Arabian General Invest- ment Authority (SAGIA)—of all of the various applications, rules, and regulations that had to be completed by a foreign company in order to start a business in the Kingdom. The government was making a concerted effort to significantly increase foreign investment coming into the country. In this respect, tax rates and tax regulations were ranked as one of the least problematic factors for doing business, along with a low-level burden of govern- 1 IMD, Global Competitiveness Yearbook, 2009. September 30, 2009 Do N ot C op y or P os t This document is authorized for educator review use only by MUHAMMAD ATHER ELAHI, Institute of Business Administration until Sep 2021. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860 2 TB0027 ment regulation. Foreign investment was seen as a way to diversify the economy away from its concentration on energy, transfer new knowledge and technology into the country, and provide an alternative source of revenue for the Kingdom. Foreign Investment Environment One of the first steps in the action plan to come out of the Monday meeting of WCC’s finance and marketing department heads was to learn more about the role of SAGIA. Research revealed that SAGIA combined three departments and nine ministries into one office at one location to assist foreign investors. In a statement by the governor of SAGIA, Amr bin Abdullah Al-Dabbagh,2 he shared their vision, “… to attract sufficient investment to achieve sustainable rapid economic growth, while capitalizing on the Kingdom’s competitive strengths as the global capital of energy, and as a major hub between East and West.”3 SAGIA intended to position Saudi Arabia among the top ten most competitive nations by 2010 through the creation of a pro-business environment and a knowledge-based society, while putting forth its best effort to make Saudi Arabia a favorable investment destina- tion in the region and throughout the world. SAGIA’s role was to provide comprehensive licensing and support services to investors while they established their businesses. In addition, SAGIA would become the investors’ information clearinghouse, serving as a central repository of information regarding business in the country, including key economic news and indicator reports, competitiveness studies, general statistics and economic research, and the country’s laws and regulations. While they intended to provide services to investors in all sectors of the Saudi economy, SAGIA planned to emphasize three sectors: energy, transportation, and information and communications technology (ICT). SAGIA intended to cooperate with other government agencies and private sector organizations to improve the country’s business laws and policies according to international best practices, so that a healthy investment environment would develop and continue in future years. An increasingly globalized economy required Saudi Arabia’s business climate to be attractive and competitive. As a start, in August 2004, SAGIA (1) updated its list of policies and procedures that required revision, (2) compared the country’s practices to its benchmarked countries, and (3) began cooperating with relevant government authorities on procedural improvements. To maximize users’ ease and efficiency, SAGIA’s One Step Shops (OSS) centralized a wide range of criti- cal services—all focused on making it as easy as possible to invest in, or set up and operate, a business in the Kingdom. A large number of government departments were represented in each OSS, providing investors with fast, hassle-free access to 128 business-related services, ranging from government licensing to telecommunica- tions and banking services. As the government agency responsible for both promoting and licensing investments within the Kingdom, SAGIA would be the sole contact point between investors and the Saudi Government, and would provide all government services through its OSS operations.4 Seth’s finance and marketing group considered the SAGIA OSS services operations listed below, many containing hyperlinks, very helpful as they evaluated their investment strategy. 2 His Excellency Mr. Amr Al-Dabbagh is the Governor and Chairman of the Board of the Saudi Arabian General Investment Authority (SAGIA), with the rank of Minister. In the years since assuming the position in March 2004, SAGIA has seen the value of investment licenses grow to 19 times the total since it was created in 2000 (from US$4.5 billion to $US80 billion). Al-Dabbagh has been lauded by government and private sector leaders for his visionary and highly ambitious leadership, which recently garnered several awards for him, including Man of Year from Arabian Business Magazine, Global Leader of Tomorrow from the Executive Board of the World Economic Forum and the Editorial Board of Worldlink magazine, and the Leadership Award of the 12th Arab Economic Forum. Since 2005, SAGIA has been the architect behind the launch of an entirely new global product called “Economic Cities.” These super-high-tech, 100 percent privately held total living and investing environments will, by 2020, have added more than US$150 billion to the Saudi GDP, 1.5 million jobs, raised the per capital GDP from 13,000 to 33,500 riyals, and provided ultimate living destinations to more than 4.5 million people. Five of six cities have already been launched, with a total value of more than US$80 billion. These include King Abdullah Economic City in Rabigh, Prince Abdul Aziz Bin Mousaed Economic City in Hail, Knowledge Economic City in Madina, and Jizan Economic City in Jizan. [http://www.sagia.gov.sa/english/uploads/HEBio_2008October.pdf, downloaded 8/19/09] 3 Information about SAGIA is taken from www.SAGIA.gov.sa. 4 Web links to Saudi Arabia government procedures and licensing requirements: http://www.sagia.gov.sa/english/uploads/ Government%20Procedures_%D9%90En_2.2.1.2.pdf; http://www.sagia.gov.sa/english/index.php?page=documents- downloads.D o No t C op y or P os t This document is authorized for educator review use only by MUHAMMAD ATHER ELAHI, Institute of Business Administration until Sep 2021. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860 TB0027 3 SAGIA was focusing on small and medium-sized businesses, information and communications technology, and biotech and pharmaceuticals. SAGIA provided examples of success stories in the area of telecommunications, summarized below. Mobile Telephone Mobile Telephone—In 2004, United Arab Emirates operator Etisalat paid US$3.3 billion for the Kingdom’s second GSM license. Etihad Etisalat has since gained 30 percent of the Saudi mobile market and offers a range of 3G services. The Kingdom’s third mobile license was awarded to a Kuwaiti-led consortium, which made a US$6 billion bid against six other companies. Competition is propelling Saudi Arabia towards its goal of acquir- ing one of the region’s most advanced and diversified telecommunications markets. Rapid growth is expected to continue due to still-low penetration rates across many fixed-line and mobile services. Newly appointed Saudi providers, the Bahrain Telecommunications Company (Batelco), Hong Kong-based PCCW, and U.S.-based Verizon Communications have formed consortia with local interests. SAP SAP—Many of the largest clients in SAP’s portfolio are based in Saudi Arabia, including world-class players such as Saudi Aramco, Saudi Electricity Company, Saudi Arabian Airlines, Saudi Basic Industries Corporation, and the Saudi Arabian General Investment Authority. To accommodate its aggressive growth